"Fiscal cliff" hopes lift Asian shares, other risk assets

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Published December 18, 2012

| Reuters

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TOKYO – Asian shares and other risk assets rose on Tuesday as signs of compromise sparked new optimism that the U.S. "fiscal cliff" budget tussle could be settled before tax hikes and spending cuts begin to bite early next year.

Differences over how to resolve the fiscal cliff narrowed significantly Monday night as President Barack Obama made a counter-offer to Republicans that included a major change in position on tax hikes for the wealthy, according to a source familiar with the talks.

The move, which the source stressed was not Obama's final offer, was welcomed by a spokesman for Republican House of Representatives Speaker John Boehner, potentially advancing negotiations towards a deal by the end-year deadline.

Oil, copper and gold also firmed on the prospect of progress in the U.S. budget talks, which reduced worries about economic damage, but expectations of more monetary easing in Japan kept the yen soft.

"The market will view any advance in talks as positive for confidence, which has been battered by the daily flow of political fighting," Ben Taylor, sales trader at CMC Markets said in a report.

"Regardless of what is decided, the market is looking for a decision and any compromise will help provide a clearer picture for the future."

European shares were expected to keep up the positive momentum, with financial spreadbetters predicting London's FTSE 100 , Paris's CAC-40 and Frankfurt's DAX will open as much as 0.5 percent higher. A 0.3 percent gain in U.S. stock futures suggested a higher Wall Street opening.

MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.2 percent, following a rise in global shares on Monday. The index snapped an eight-day winning streak on Monday as investors took profits from last week's rally.

Regional equities also took direction from local factors.

Australian shares gained 0.5 percent to a 17-month high, with resource stocks elevated by a rise in iron ore prices to a five-month high.

"Iron ore is a very key commodity in the Chinese industrial machine, steel usage will bounce back and that is good news for our exporters," said Baillieu Holst director Richard Morrow.

Seoul shares rose marginally but underperformed some others in Asia, as investors were reluctant to build positions ahead of South Korea's presidential vote on Wednesday.

London copper was up 0.3 percent to $8,085 a metric ton (1.1023 tons).

"Before the end of the year, I don't really see huge selling pressure, with improving data from China and expectations for a resolution to the fiscal cliff," said analyst Bonnie Liu of Macquarie.

U.S. crude surged 0.8 percent to $87.85 a barrel and Brent rose 0.7 percent to $108.41.

In Japan, the Nikkei average closed up 1.0 percent at an 8-1/2-month high and edged closer to the key 10,000-mark, with sentiment bolstered by a landslide election win for the conservative Liberal Democratic Party on Sunday.

LDP leader Shinzo Abe, due to be confirmed as Japan's premier on December 26, is calling for far more aggressive monetary stimulus and huge public works spending to rescue Japan from decades-long deflation. His pledges are seen as pressuring the yen and supporting Japanese stocks by improving earnings for the country's exporters.

"The Nikkei is up today primarily due to the rise in U.S. stocks overnight, but the 'Abe-effect' is surprisingly longer-lasting as investors seem to be postponing the timing of unwinding their positions until they see the details and specifics in policies," said Ayako Sera, market economist at Sumitomo Mitsui Trust Bank.

The dollar inched up 0.1 percent to 83.96 yen, off a 20-month high of 84.48 yen hit on Monday but well above its late New York levels on Friday.

Abe applied fresh pressure on the Bank of Japan on Monday, saying that the election result reflected strong public support for his views, which he hoped the BOJ would take into account at its two-day policy meeting starting on Wednesday.

"The dollar has more upside against the yen ahead of the BOJ's meeting, with expectations for some additional easing steps being strengthened after Abe's comments yesterday," said Yuji Saito, director of foreign exchange at Credit Agricole in Tokyo.

"The corrective fall in the dollar/yen after the election was small and it's crawling up because the yen weakening trend is still intact. But after the BOJ meeting, there will likely be pre-holiday profit-taking, pushing the dollar/yen down by 1 to 2 yen," Saito said, adding that the dollar could temporarily touch 85 yen before profit-taking sets in by year-end.

Concerns that big-scale fiscal stimulus could seriously increase the country's debt burden pushed the benchmark 10-year Japanese government bond yield to a one-month high of 0.750 percent.

U.S. Treasury yields also inched up in Asia, with the 10-year yields briefly reaching 1.796 percent, its highest level since October 26, on hopes for a deal on the U.S. fiscal cliff. [US/T

(Additional reporting by Victoria Thieberger in Melbourne and Manash Goswami and Melanie Burton in Singapore; Editing by Richard Borsuk)